Stakeholder Orientation and Managerial Incentives: Evidence From a Natural Experiment
37 Pages Posted: 14 Mar 2019 Last revised: 6 Jul 2021
Date Written: February 23, 2019
This paper analyzes the influence of stakeholder orientation on the design of managerial incentives. Our tests exploit the quasi-natural experiment provided by the staggered adoption of directors’ duties laws (i.e., state-level laws that explicitly expand board members’ duties to act in the best interests of all stakeholders). We find that the enactment of these laws results in a significant decrease in the sensitivity of CEO wealth to the stock price, or delta. The decrease in the delta of CEO compensation is more pronounced for firms with higher board independence and with stronger relationships with stakeholders. Our results suggest that the decrease in the sensitivity of CEO compensation to the stock price is an important channel used by boards to internalize stakeholder orientation.
Keywords: stakeholder orientation, executive compensation, managerial incentives, directors’ duties laws, constituency statutes, corporate social responsibility
JEL Classification: G21, G30, J33, M14
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